Understanding the psychology of investing matters more than ever

By Tim Conlin

“The most important quality for an investor is temperament, not intellect.”

This statement from Warren Buffett becomes particularly apt as the uncertainty surrounding tariffs and double-digit declines in major indexes, such as the S&P 500 and Nasdaq composite, is causing some investors to question their commitment to long-term investing.

However, in times of market turmoil, investors must recognize that our primal stress responses — such as literal tunnel vision — once crucial for survival on the savannah, now narrow our focus to immediate concerns, clouding judgment and hindering the critical thinking necessary to achieve long-term goals.

So, how can investors hone their temperament, navigate market volatility and act based on reason rather than emotion?

First, it’s crucial to determine whether you are engaging with the markets as an investor or a trader because each role demands distinct costs and psychological mindsets for success.

Traders aim to outsmart others by timing markets and seizing short-term opportunities for quick profits. They are comfortable with risk and highly confident in their ability to succeed, even when making investments with limited information. However, unless you possess a unique skill or talent, making bets on the market will not lead to long-term wealth accumulation.

Conversely, investors achieve success not by fixating on daily price fluctuations, but by maintaining a long-term perspective and investing in great businesses that adapt to challenging market conditions, innovate and thrive over time. Essentially, investors participate in long arcs of progress backed by human ingenuity that withstand the test of time.

Acknowledging that you may have a trader temperament and recognizing that this is not the most effective approach to successful wealth planning may prompt you to pause before making risky investment decisions.

Having a highly triggered fight-or-flight response can prompt you to sell out of your positions when markets become rocky.

As an investor, understanding key market data can strengthen your psychological resilience during periods of market stress. According to a study by J.P. Morgan, seven of the stock market’s best days over the past 20 years occurred within just 15 days of one of the market’s 10 worst days. This means that the market’s worst days and best days are clustered together.

The implications of missing the best days are startling. If an investor misses just the 10 best-performing days, they would have received only a 5.7 per cent average annualized return compared to 9.9 per cent for those who didn’t try to time the markets.